BoE/SNB rate view: hold still for longer

Highlights: The Bank of England (BoE) kept Bank Rate unchanged at 3.75 per cent, reflecting a cautious stance as inflation in the UK moderates but remains above target, and wage pressures persist. Falling energy prices and easing labour market conditions should ease pressure on future policy hikes, even as the magnitude of “second round” inflationary forces remain uncertain. As a result of the risk to inflation being more balanced, we no longer see any rate hikes this year. UK equities continue to trade at attractive valuations, though earnings momentum remains less compelling than in other major markets. We therefore remain neutral on UK equities, conventional gilts and sterling, while maintaining an overweight stance on index-linked gilts, given their attractive inflation protection. Separately, the Swiss National Bank (SNB) left rates unchanged at 0 per cent, supporting our neutral view on both, the Swiss franc and Swiss equities.

• The Bank of England kept Bank Rate unchanged at 3.75 per cent in a 7-2 vote, highlighting the difficult balance between competing inflationary forces
• While UK CPI inflation has moderated to 2.8 per cent, policymakers remain concerned about potential second-round effects from energy costs and wage negotiations, leading the MPC to maintain a cautious “wait-and-see” approach for now
• The UK economy continues to show mixed signals too. Labour market conditions are gradually softening and vacancy levels have declined, but consumer demand remains subdued and economic growth is expected to stay modest in the near term
• The Swiss National Bank left policy rates on hold at zero, saw no change in the medium-term inflation outlook, and maintained its currency intervention guidance. With inflation safely within the target range and risks to excessive CHF appreciation having eased recently, we think there is little incentive for the SNB to hike policy rates for the foreseeable future. We have a neutral medium-term view on CHF and Swiss equities
• Portfolio implications: We maintain a balanced allocation across UK assets. Attractive valuations and moderating inflation are likely to provide some support, but uncertainty around growth, inflation and policy remains elevated. We therefore favour inflation-protected bonds while remaining selective across UK and Swiss risk assets